U.K. BUDGET BUTCHERS PUT PUBLIC FINANCES ON THE CHOPPING BLOCK

June 14, 2010

Earlier this week, the United Kingdom's new coalition government announced the first round of what might fairly be considered rather mild "austerity" measures for one of the world's most indebted nations. According to the Wall Street Journal, the measures aim at reducing annual deficit by £6.25 billion (about $897 billion). Impressive as that might sound, it is a drop in the pail when viewed next to the nation's record-breaking £156 billion (about $224 billion) deficit for the most recent financial year, says Joel Bowman, managing editor of the Daily Reckoning.

It is not difficult to understand why a new government would opt for a "softly softly" approach. Budgetary savings must be weighed against a cost to political capital. A dollar saved is a vote lost, in other words, says Bowman:

Over the past thirteen years -- since the Labor government first came to power in 1997 -- the number of public sector employees increased in the United Kingdom by almost 1 million, with government jobs now accounting for more than one-fifth of the total workforce.

Public sector wages are also rising at almost three times the pace as in the private sector and last year the average compensation for state workers actually eclipsed that of their private sector counterparts.

Public sector workers on average, retire seven years earlier than those in the private sector, work fewer hours (35 per week), take three to four more paid days off annually and receive employer pension contributions worth 19.4 percent of their wages, more than three times the 6 percent average contributions afforded in the private workplace.

Despite these comparative advantages (or perhaps because of them) productivity in the U.K.'s public sector actually fell by 3.4 percent in the 10 years from 1997 -- compared with an increase of 28 percent in the private sector over the same period.

Unfortunately, for those seeking to push through spending cuts, it is virtually impossible to get rid of a public employee once you have one on the books, says Bowman:

In the two years following the collapse of the consumer bank Northern Rock in late 2007, the state increased its workforce by some 300,000 members.

The private sector, by contrast, took the axe to almost a million jobs last year alone.